The discount rate for valuing assets under sale-leaseback arrangements is the rate implicit in the lease. If that rate cannot be determined reliably, use the lessee's incremental borrowing rate. This treatment is established in IFRS 16 Leases issued by the International Accounting Standards Board at the IFRS Foundation and mirrors guidance in ASC 842 issued by the Financial Accounting Standards Board.
Applicable Discount Rate
IFRS 16 requires the seller-lessee to measure the lease liability using the present value of lease payments discounted at the rate implicit in the lease when that rate is determinable. The rate implicit in the lease reflects the lessor's yield and the fair value of the underlying asset and therefore aligns the valuation with the economic substance of the transaction. When the lessor’s rate implicit is not directly observable to the lessee because fair value or lessor yield data are unavailable, IFRS 16 directs the lessee to use its incremental borrowing rate. The Financial Accounting Standards Board provides analogous direction under ASC 842, reinforcing the same hierarchy of rates.
Relevance, Causes and Consequences
Choosing between the rate implicit in the lease and the incremental borrowing rate matters because it affects the present value of lease payments, the initial measurement of the lease liability, and any immediate gain or loss on disposal. A lower discount rate reduces the lease liability and can increase recognized profit on sale-leaseback transactions when the transfer qualifies as a sale. A higher rate increases liabilities and can tighten covenant metrics or alter tax outcomes. Causes for undeterminable implicit rates include complex lease structures, absence of transparent fair value information, and disparate accounting practices across jurisdictions. In emerging markets with thin capital markets, incremental borrowing rates may be materially higher, changing the economics of sale-leaseback deals compared with developed markets.
Beyond accounting, the discount rate choice has human and territorial implications. Property owners in rural regions may rely on sale-leasebacks to monetize real assets while continuing operations, and higher incremental borrowing rates can reduce proceeds available for investment in local communities. Environmental considerations arise when the underlying asset is land or industrial premises where continued use affects local ecosystems. Practitioners should refer to guidance from the International Accounting Standards Board at the IFRS Foundation and the Financial Accounting Standards Board when determining which rate applies and document the basis for the selected discount rate.